240 CLR 481]
FCT V BAMFORD
COMMISSIONER OF TAXATION OF THE
COMMONWEALTH OF AUSTRALIA.. ....
RESPONDENT,
481
APPELLANT;
AND
BAMFORD AND OTHERS.. ..............................
APPLICANTS,
RESPONDENTS.
BAMFORD AND ANOTHER.............................
APPLICANTS,
APPELLANTS;
AND
COMMISSIONER OF TAXATION OF THE
COMMONWEALTH OF AUSTRALIA
AND ANOTHER...........................................
RESPONDENT AND APPLICANT,
RESPONDENTS.
[2010] HCA 10
ON APPEAL FROM THE FEDERAL COURT OF AUSTRALIA
Income Tax (Cth) — Income — Trust estate — Assessable income of
beneficiary — Share of net income of trust estate — Calculation of share
— Whether specific amount or proportionate part — Capital gains —
Treatment by trustee as distributable income — Relevance for assessment
— Income Tax Assessment Act 1936 (Cth), ss 95-99A.
Section 97(1)(a)(i) of the Income Tax Assessment Act 1936 (Cth)
provided (subject to an exception that is not material) that, where a
beneficiary of a trust estate who was not under any legal disability was
presently entitled to a share of the income of the trust estate, the
assessable income of the beneficiary should include so much of that share
of the net income of the trust estate as was attributable to a period when
the beneficiary was a resident. Section 95(1) defined “net income”, in
relation to a trust estate, to mean the total assessable income of the trust
estate calculated under the Act as if the trustee were a taxpayer in respect
of that income and were a resident, less all allowable deductions (except
certain deductions which are not material).
Held, (1) that a capital gain which was treated by a trustee, under the
terms of a trust deed, as income available for distribution and was
distributed to beneficiaries presently entitled should be included in the
assessable income of those beneficiaries. The “income of a trust estate” in
s 97(1) was to be understood as income according to the general law of
trusts.
HC of A
2010
March 2, 3,
30 2010
French CJ,
Gummow,
Hayne,
Heydon and
Crennan JJ
482
COMMONWEALTH LAW REPORTS
[2010
(2) That the expression in s 97(1)(a)(i) “that share of the net income of
the trust estate” referred to the proportion of the distributable income of
the trust estate ascertained by the trustee according to appropriate
accounting principles and the trust instrument.
Zeta Force Pty Ltd v Federal Commissioner of Taxation (1998) 84 FCR
70 at 74-75, approved.
Decision of the Federal Court of Australia (Full Court): Bamford v
Federal Commissioner of Taxation (2009) 176 FCR 250, affirmed.
APPEALS from the Federal Court of Australia.
A trust was established by deed dated 9 February 1995 of which
P & D Bamford Enterprises Pty Ltd was trustee. The “Eligible
Beneficiaries” included Mr P J Bamford, his wife Mrs D L Bamford,
their children, and such other persons, trusts or companies or charities
as the trustee appointed to be beneficiaries. The trustee appointed
Narconon Anzo Inc and the Church of Scientology Inc. Clause 3(a) of
the deed required the trustee to stand possessed of the Trust Fund and
the income thereof in trust for all of such one or more exclusively of
the others of the Eligible Beneficiaries and in such shares or
proportions as the Trustees should revocably or irrevocably appoint
from time to time before a certain date (the “Closing Date”). Clause 4
provided that in default of and subject to any determination under cl 3
the trustee should stand possessed of (a) the income of the Trust Fund
during the Trust Period (i) to hold the income arising in any year, or
such part of it as the trustee determined, for such one or more to the
exclusion of the others of the Eligible Beneficiaries and in such
proportions or manner as the trustee in its absolute discretion from
time to time but on or prior to 30 June in any year determined;
(ii) subject to the exercise of that power to accumulate the whole or
part of the income that was not paid or applied during such period as
was permissible by law; (iii) subject to (i) and (ii) until a certain date to
pay or distribute the whole of the income or such part as was not paid
or applied by the end of a year for [sic] all or such one or more to the
exclusion of the others of the Eligible Beneficiaries in such proportions
as the trustee by the end of the year in its absolute discretion
determined; (b) of the capital (i) for such of the children of
Mr Bamford as were living at the Closing Date as tenants in common
in equal shares with substitutional gifts for the children of any child
who died before the Closing Date equally per stirpes; (ii) if any of the
capital did not vest under (i) for such of the Eligible Beneficiaries as
were living at the Closing Date as tenants in common in equal shares;
(iii) if the capital did not vest under (i) or (ii) for such charitable
purposes as the trustee determined. Clause 4(e) empowered the trustee
in its discretion in making any payment determination or application of
income or capital to determine and identify which income or capital or
which part of the income or capital or which class of income or capital
(whether by reference to source nature or otherwise) of the Trust Fund
was the subject of any particular determination and provided that the
income or capital was to be treated for all purposes as being paid,
240 CLR 481]
FCT V BAMFORD
483
applied, set aside or accumulated, as the case may be, from the income
or capital or part or class thereof so identified. Neither “income” nor
“capital” was defined, but by cl 7(n) the trustee was given power to
determine in its absolute discretion whether any receipt, profit or gain
or payment, loss or outgoing or any sum of money or investment was
to be treated as being on income or capital account. If it failed to make
a determination, or to the extent to which it failed to do so prior to the
end of a year, the income of the Trust Fund for that year was to be
calculated in the same manner as the net income of the trust estate was
to be calculated under the provisions of the Income Tax Assessment Act
1936 (Cth).
On 30 June 2000 the trustee determined that “the income” for the
year ended 30 June 2000 be allocated “in the following proportions”:
the first $643 to a named child of Mr and Mrs Bamford, the next $643
to another named child, the next $12,500 to Narconon Anzo Inc, the
next $105,000 to the Church of Scientology Inc, the next $68,000 to
Mr and Mrs Bamford in equal shares, and the balance to the Church of
Scientology Inc. The trustee determined pursuant to cl 7(n) that certain
outgoings of $191,701 be treated as expenses and wrongly treated them
as allowable deductions in calculating the net income of the trust estate
for the purposes of s 97(1) of the 1936 Act. The total income for
distribution and the net income of the trust under s 95 was shown as
$187,530. After the distribution to the children, Narconon Anzo Inc
and the Church of Scientology Inc, there was only sufficient income to
distribute $33,872 to each of Mr and Mrs Bamford. The Commissioner
assessed Mr and Mrs Bamford by calculating the ratio which the actual
distributions of $33,872 bore to $187,530 and then applied that ratio to
the disallowed deduction of $191,701. The amount so calculated of
$34,624 was then included in the assessable income of each of Mr and
Mrs Bamford. The taxpayers objected to the assessments on the ground
that “that share” in the opening words of s 97(1), where a beneficiary’s
present entitlement was to a proportionate part of the income of a trust
estate, meant that proportionate part of that income, or, where the
present entitlement was to a specified amount, that specified amount.
On 30 June 2002 the trustee determined that “the net income” for
the year ended 30 June 2002 be distributed to Mr and Mrs Bamford,
the first $60,000, including capital gain, shared equally; to the Church
of Scientology Inc, the balance. The capital gain referred to $29,227
(half of $58,454) which arose from the sale of certain real estate. The
Trustee made no express determination under cl 7(n) that the capital
gain was to be treated as being on income account but in objection and
appeal proceedings it was accepted that the trustee had treated the
capital gain as income available for distribution. The Commissioner
assessed the trustee on the footing that the capital gain was not to be
included in “the income of the trust estate” for the purposes of s 97(1)
because it was not income according to ordinary concepts and hence
484
COMMONWEALTH LAW REPORTS
[2010
that the trustee was liable to be assessed under s 99A. The trustee
objected to the assessment.
The three objections were disallowed and on review the
Administrative Appeals Tribunal (J Block Deputy President and
G D Walker Deputy President) affirmed the assessments. The taxpayers
appealed from the decisions of the Tribunal to the Federal Court of
Australia. The appeal was heard by a Full Court (Emmett, Stone and
Perram JJ) pursuant to s 44(3) of the Administrative Appeals Tribunal
Act 1975 (Cth). The appeal relating to the 2000 tax year was
dismissed; the appeal relating to the 2002 year was allowed and the
matter was ordered to be remitted to the Tribunal to be reconsidered
and determined (1). The taxpayers and the Commissioner appealed to
the High Court in respect of parts of the order of the Federal Court by
special leave granted by French CJ and Heydon J.
A H Slater QC (with him R L Seiden and I S Young), for Mr and Mrs
Bamford in the beneficiaries’ appeal and the trustee in the
Commissioner’s appeal.
Beneficiaries’ appeal: In the phrases “a share of the income of the
trust estate” and “that share of the net income” in s 97 of the Income
Tax Assessment Act 1936 (Cth), “share” means “the interest directed by
the terms of the trust”. The amount included in assessable income by
s 97(1)(a)(i) as “that share of the net income of the trust estate” is
calculated by applying the terms of the trust to the amount of “net
income” fixed under s 95. The Full Court erred in holding that “that
share” in s 97(1) refers to the proportion of the net income of the trust
estate equal to the proportion that the income to which the beneficiary
is presently entitled bears to the income that has been distributed
during the year or remains available for distribution at its end. Section
97(1) is to be read as an entirety and its meaning requires reference to
context which includes its general purpose and policy and the mischief
it was designed to remedy. The mischief identified in ss 26(1) and
27(2) of the Income Tax Assessment Act 1915 (Cth) was cured by a
legislative scheme designed to secure payment of tax on the whole of
the net income of a trust estate and to allocate liability among the
trustee and beneficiaries according to the extent of present
entitlement (2). [HAYNE J. The hinge about which the earlier
provisions turned was “trustee”; might s 96 be seen as the central
provision of Div 6?] Section 96 is no more significant in the legislative
scheme than the provisions of ss 97, 98 and 99.] The assumption
behind s 97 was that the person who derives the income should be in a
(1)
(2)
Bamford v Federal Commissioner of Taxation (2009) 176 FCR 250.
Tindal v Federal Commissioner of Taxation (1946) 72 CLR 608 at 618; Federal
Commissioner of Taxation v Belford (1952) 88 CLR 589 at 606; Union-Fidelity
Trustee Co of Australia Ltd v Federal Commissioner of Taxation (1969) 119 CLR
177 at 187.
240 CLR 481]
FCT V BAMFORD
485
position to pay the tax out of the income (3). The implicit assumption
was that the fund of trust income to a share of which a beneficiary
could become “presently entitled” was coextensive with what “the
trustee [would be] liable to pay tax in respect of”. The language both
measures liability by reference to net distributable income and assumes
that the individual interest to which the beneficiary is presently entitled
is in a net amount calculated in substantially the same way as the “net
income” defined by s 95. That assumption was appropriate to the legal
and social context in 1915 when trustees received income from a
narrow range of investments which was readily identifiable as detached
money in which beneficiaries had an equitable proprietary interest.
Two changes occurred which have led to material disparities between
income ascertained for the purpose of settling rights of beneficiaries
and s 95 net income: various amounts not treated as income between
life tenant and remaindermen, such as capital gains, have been
included in assessable income and hence s 95 net income; and the
conduct of businesses by trustees has become normal in Australian
commerce. Where there is a disparity between distributable income and
s 95 net income the underlying assumption of Whiting’s case (4) is
falsified. If the net income is greater than the distributable income,
liability to tax on the excess will fall either on the beneficiaries, even
though not entitled to distributions from which the tax might be paid,
or on the trustee who must pay the tax out of corpus at the expense of
the remaindermen. If the net income is less than the distributable
income, either the beneficiaries or the trustee (on account of corpus)
will be taxed on a lesser amount than is received or retained. No
construction of s 97 wholly escapes an anomalous result when there is
such a disparity. Section 97 should be construed to accord with the
general purpose and policy of the Act, that income tax should be borne
by those who enjoy the gains or income on which it is imposed and, in
relation to Div 6, that all of the net income of a trust estate should be
subjected to tax. That is achieved by aligning “income of the trust
estate” with “net income” on which by s 97 tax is imposed and by
construing “a share of the income of the trust estate” and “that share of
the net income” to bring the tax burden into alignment with entitlement
to distributions. The ordinary meaning of “share” is “the part or portion
(of something) which is allotted or belongs to an individual, when
distribution is made among a number” (5). The connotation of “share”
in the chapeau to s 97(1) and para (a)(i) is the interest directed by the
terms of the trust. The hypothetical “as if” in para (a)(i) is mandated by
the requirement that the “share” in the “income of the trust estate” is to
be applied to the net income. In the case of a gift of income to
members of a class “in equal shares”, the denotation of “share” may be
(3)
(4)
(5)
Federal Commissioner of Taxation v Whiting (1943) 69 CLR 199 at 214-215.
(1943) 68 CLR 199 at 215.
Oxford English Dictionary, 2nd ed (1989), 1a; Doe d Clift v Birkhead (1849)
4 Exch 110 at 125 [154 ER 1145 at 1151].
486
COMMONWEALTH LAW REPORTS
[2010
a fractional interest; but neither fraction, ratio, nor proportion (nor the
amount produced by application of a fraction) is the connotation of
“share” in the Act. In such a case the directed fraction is the
specification, in the terms of the trust, of the beneficiary’s share, and so
application of the fraction is the method by which in the events of the
income year the beneficiary’s share is to be quantified. The interest in
income may be fixed in a different way, eg, as a specified annuity or
even an amount. In such a case, while the connotation of “share” in
“share of the income” is constant, as the interest in the trust income
defined by the terms of the trust, its denotation in “share of the
income” is the result of applying the terms of the trust to the trust
income, yielding the right to receive that specified amount. The
connotation of “share” is not “fraction”, ratio or proportion and is not
the fraction or ratio which the specified sum adventitiously bears to
whatever happens to be the total income for the year. The beneficiary’s
right does not depend on the amount of the total income as it would if
“share” meant fraction. It is the entitlement to the specified sum. While
the denotation of a beneficiary’s share may vary from a proportion of
the whole to an annuity to a fixed sum, the connotation of “share” must
be constant. The meaning of “share of the income of the trust estate”
which most sensibly remains constant across a range of potential
entitlements to trust income is “interest in the income of the trust estate
pursuant to the terms of the trust”. Two other constructions of “share”
in s 97 have been advanced. One – the “quantum” view – construes it
to mean the monetary amount to which the beneficiary is entitled, so
that the same monetary amount is the beneficiary’s share of the net
income; an excess of net income is taxed to the trustee as a share of net
income to which no beneficiary is entitled, while a shortfall simply
reduces the tax burden. This view has not found judicial or academic
support, and should be rejected. The second – the “proportional view”
– construes “share of the income” in respect of a beneficiary as
meaning simply the fraction or ratio which in the event the amount to
which the beneficiary is entitled bears to the total income, so that the
fraction or ratio so derived is applied to the net income to ascertain
“that share” assessable to the beneficiary. That view was adopted by
the Full Court. Where by the terms of the trust each beneficiary is
entitled to a fractional or proportional share (or one is entitled to all) of
“the income”, the connotation for which the appellants contend
produces the same result as the respondent’s contention. In all the cases
in which the meaning of “share” in s 97 has been considered the
reasoning has proceeded on the premise that the interests of
beneficiaries in the income of the trust estate were fractional, or that
there was only one entitled beneficiary (6). In each other case the
(6)
See Davis v Federal Commissioner of Taxation (1989) 20 ATR 548 at 575-577; 86
ALR 195 at 229-231; 89 ATC 4,377 at 4,402-4,404; Richardson v Federal
Commissioner of Taxation (1997) 80 FCR 58; Zeta Force Pty Ltd v Federal
Commissioner of Taxation (1998) 84 FCR 70 at 72-73; Cajkusic v Federal
240 CLR 481]
FCT V BAMFORD
487
entitlement in trust law was assumed to be sole or proportional (7).
This is the first appeal calling for the construction of s 97 where
entitlements under the terms of the trust are partly to fixed amounts and
partly to proportions of the balance of the income. Where the
entitlements of some beneficiaries are fixed and those of others are
proportional or residual the competing constructions produce different
results. The appellants’ construction consistently imposes the burden of
tax on the discrepancy on the beneficiaries who enjoy the balance of
the income in a manner as close to being rational as the departure from
reality imposed by a deeming provision permits. The respondent’s
construction produces for beneficiaries entitled to fixed income tax
results which vary dramatically according to the total amount of trust
income. In reaching a construction which best accords with the policy
and purpose of the legislation, one ascribing to “share” in “the share of
the income” a meaning which rests on the basis of entitlements to
income is preferable to one which rests on the caprice of numbers in
the calculation of fractions.
Commissioner’s appeal: The issue concerns “presently entitled to a
share of the income of the trust estate” in s 97. The s 95 “net income”
of the present trust estate was calculated by including a net capital
gain: exclusion of that amount would have meant that there was no
“income of the trust estate” to which any beneficiary was presently
entitled. We submit that (a) the subject matter of entitlement to a share,
in “presently entitled to a share of the income of the trust estate”, is
that which, as a matter of trust law as applied to the terms of the trust,
is distributable to entitled beneficiaries as the annual yield of the trust
estate; (b) the notion of income according to ordinary concepts is one
of tax law, not a trust law concept governing entitlements of
beneficiaries; (c) it is present entitlement which is the measure by
which liability to assessment upon the “net income” as defined by s 95
is imposed; and (d) while there is a substantial overlap between the
subject matter of present entitlement for s 97, and “assessable income”
for s 6-5, the two concepts are not congruent. The Commissioner
contends that “presently entitled to a share of the income of the trust
estate” should be severed into two parts to be construed in isolation
and that “the income of the trust estate” should be construed first and
apart from its context. The trustee submits that (a) the relevant context
is that it is the extent of present entitlement to “the income” which
(cont)
(7)
Commissioner of Taxation (2006) 155 FCR 430 at 436.
eg, Peabody v Federal Commissioner of Taxation (1992) 24 ATR 58; [1992] ATC
4,585; Richard Walter Pty Ltd v Federal Commissioner of Taxation (1995) 31 ATR
95; 95 ATC 4,440; Grollo Nominees Pty Ltd v Federal Commissioner of Taxation
(1997) 73 FCR 452; Federal Commissioner of Taxation v Prestige Motors Pty Ltd
(1998) 82 FCR 195; Hart v Federal Commissioner of Taxation (2003) 131 FCR
203 at 205; Kajewski v Federal Commissioner of Taxation (2003) 52 ATR 455 at
457; [2003] ATC 4,375 at 4,376; Pearson v Federal Commissioner of Taxation
(2006) 64 ATR 109 at 112-113; 232 ALR 55 at 57.
488
COMMONWEALTH LAW REPORTS
[2010
identifies the “share” by reference to which s 97(1)(a) makes
beneficiaries assessable on s 95 “net income”; (b) the expression
should be construed as a whole and in context: the emphasis is on
“presently entitled” as the relevant criterion and not on “income”;
(c) “income” is not an independent criterion of liability but is the
subject matter of the (entitlement) criterion. Construed in that context,
the subject matter of “present entitlement” is what is detached from the
trust estate so that the life tenant, or beneficiaries entitled to annual
distributions of the yield of the estate, may become presently entitled
to demand payment. The notion of an annual yield or income is
fundamental to the legislative scheme: see ss 3-5, 4-10 and 6-5(2). The
1918 amendments of the Income Tax Assessment Act substituted
entitlement to distribution for the 1915 provisions because the 1915
scheme, resting on a reduction of the tax imposed on the trustee
proportionate to the distributions made, left income not distributed in
the year taxable to the trustee at a higher rate than that imposed on
beneficiaries entitled to the income but not yet in receipt of it. The
requirement of present entitlement secured that the beneficiary was not
taxed on, and the trustee did not escape tax in respect of, amounts the
beneficiary was entitled to receive in future or on a contingency (8).
Where a business was properly conducted by a trustee a life tenant was
ordinarily entitled to receive only what the trustee prudently
determined was available for distribution (9). An entitlement to a share
of profits arose only when accounts disclosing them were or ought to
have been taken (10). Hence income was identifiable as detached
money in the hands of the trustee and present entitlement was the right
to demand payment. The conduct of businesses by means of a trust has
become an accepted phenomenon here. In the absence of express
directions in the trust instrument the present entitlement principles
developed for income beneficiaries continued to apply but it is now
common for entitlement to be confined to calculated income: income to
which beneficiaries are entitled is detached from the trust fund for
distribution (11). Where the issue arises under a statute, the statutory
language must be construed in its context (12). But where the statute
adopts as its criterion the terms of the trust, as s 97(1) does, the
operation of the trust is imported and becomes the statutory criterion.
The criterion in s 97(1) is a single compound criterion: “presently
entitled to a share of the income of the trust estate.” The words
“presently entitled”, not “income”, are the significant integer in
specifying on what a beneficiary may be assessed. The extent of that
(8)
(9)
Whiting’s case (1943) 68 CLR 199 at 215-216, 219-220; cf at 207.
Thornley v Boyd (1925) 36 CLR 526 at 536; Ritchie v Trustees Executors &
Agency Co Ltd (1951) 84 CLR 553 at 583.
(10) In re Cox’s Trusts (1878) 9 Ch D 159 at 162; In re Moore [1956] VLR 132 at 133.
(11) McBride v Hudson (1962) 107 CLR 604 at 624.
(12) Bartlam v Union Trustee Co of Australia Ltd (1946) 72 CLR 549 at 561; Union
Trustee Co of Australia Ltd v Bartlam (1948) 76 CLR 492 at 492-498; [1948] AC
495 at 505.
240 CLR 481]
FCT V BAMFORD
489
present entitlement is not limited by abstract conceptions developed for
other purposes. A beneficiary is presently entitled to an amount which
he can call upon the trustee to have immediately paid to him. The
Commissioner’s submissions confuse the concepts of “income of the
trust estate” (which may be subject to the present entitlement of a
beneficiary) and “net income of the trust estate” (as defined by s 95).
Though the concept of “income” in Australian income tax statutes has
its origins in the rules developed as to the inferred intentions of settlors
for life interests and remainders the meaning of the term in trust law is
not constrained by its meaning in income tax law. The phrase “income
of the trust estate” refers to an entitlement under the terms of the trust.
The extent of that entitlement becomes the statutory criterion. There
was no issue in Federal Commissioner of Taxation v Totledge Pty
Ltd (13) or Federal Commissioner of Taxation v Harmer (14) about the
character of the trustee’s receipt. Federal Commissioner of Taxation v
ANZ Savings Bank Ltd (15) was not concerned with whether a trust
deed could for tax purposes convert income into capital or vice versa.
Cajkusic v Federal Commissioner of Taxation (16) rejected a
submission that income for s 97 purposes cannot be governed by the
trust deed. Section 97 was not amended when capital gains tax was
introduced. The Act supposes that a capital gain is part of the income
of the trust estate which the beneficiary to whom it is allocated, and
who is entitled to a s 115-215(6) deduction, may be required to include
in his assessable income. The Commissioner’s alternative submission
that the income of the trust estate means all amounts in the hands of
the trustee that are treated as income for taxation purposes confuses the
scope of tax income (scil s 25 gross income, s 6-5 ordinary income,
and s 6-10 statutory income) with the scope of trust income to which
beneficiaries can be entitled and overlooks the consequences of
disallowed deductions for real expenses.
J T Gleeson SC (with him T P Murphy SC and K J Deards), for the
Commissioner.
Commissioner’s appeal: To be “income of the trust estate” within
s 97 an amount must be income according to ordinary concepts in the
hands of the trustee. Amounts which are not income of that kind but
which are assessable (and hence are included in the net income of the
trust estate under s 95) only by reason of express statutory provisions
are not part of the “income of the trust estate”. The meaning of
“income of the trust estate” is unaffected by terms of the trust
instrument, or by decisions of the trustee under it, such provisions and
decisions being relevant only to fixing entitlements between the trustee
and beneficiaries, and between the beneficiaries. Accordingly, if an
(13)
(14)
(15)
(16)
(1980)
(1991)
(1998)
(2006)
60 FLR 149; 12 ATR 830; 40 ALR 385; 82 ATC 4,168.
173 CLR 264.
194 CLR 328.
155 FCR 430 at 436.
490
COMMONWEALTH LAW REPORTS
[2010
amount in the hands of the trustee bears the character of capital, it is
not part of the “income of the trust estate” within s 97(1). If there is
“income of the trust estate”, the provisions of the trust instrument, and
lawful decisions made by the trustee, together with general principles
of trust law, are relevant in determining whether one or more of the
beneficiaries are “presently entitled” to that income (s 97(1)). Once the
relevant beneficiaries’ present entitlements have been established, their
respective “shares” of the income are determined on a proportionate
basis. Such shares are then applied by s 97(1)(a) to the net income of
the trust estate (under s 95) to determine how much becomes
assessable income of each beneficiary. So much of the net income that
is not assessed to a beneficiary under s 97 (or the trustee under s 98) is
assessed to the trustee under s 99A (or in a limited range of cases under
s 99).
In elaboration of the above: A trust estate is not a legal person to
which tax is assessed but is a conglomerate of assets by which income
is generated. That income is assessed to either beneficiaries or to the
trustee. In both cases the amount assessed is calculated by reference to
the “net income” of the trust estate which is defined by s 95 and is
calculated by reference to a statutory hypothesis that the trustee is a
taxpayer in respect of the assessable income of the trust estate. The
first step required by s 97 is to determine whether an amount
constitutes “income” of the trust estate. One must consider its character
in the hands of the trustee. The trustee does not receive it beneficially
but is treated as a hypothetical taxpayer in respect of the income for the
purpose of characterising the amount, just as it is for calculating the
“net income” (17). Whether an amount has the character of “income”
depends on its quality in the hands of the recipient. The trust
instrument only fixes the entitlement of a beneficiary to an amount: it is
relevant to whether a beneficiary can be described as being “presently
entitled” to a particular amount but not to whether that amount is
“income of a trust estate” for s 97. It was held in Totledge’s case that a
present entitlement was a right to demand and receive payment of what
retains the character of trust income after the full working of trust law.
The phrase “income of the trust estate”, in the absence of a separate
statutory definition, should bear its natural legal meaning (18). The
trust law meaning of “income” has influenced the development of its
tax law meaning, but the word now has its own meaning in tax law
which broadly flows from the concept of income in accordance with
the ordinary concepts and usages of mankind (19). “Income of the trust
estate” is not defined. But s 97(1)(a) provides that the amount of the
(17) Federal Commissioner of Taxation v Totledge (1980) 60 FLR 149; 12 ATR 830; 40
ALR 385; 82 ATC 4,168; Harmer v Federal Commissioner of Taxation (1991) 173
CLR 264 at 271.
(18) Federal Commissioner of Taxation v W E Fuller Pty Ltd (1959) 101 CLR 403 at
413.
(19) Federal Commissioner of Taxation v Montgomery (1999) 198 CLR 639 at 661.
240 CLR 481]
FCT V BAMFORD
491
net income to be assessed to the beneficiaries is determined by
reference to the “income” of the trust estate, not to defined terms such
as its assessable income, net income or exempt income. The concept of
income is fundamental to the operation of the 1936 and the 1997 Acts
and forms an element of the defined terms. The term “income” has
been construed to be income according to ordinary concepts unless the
statutory context has required otherwise (20). The fact that “income of
the trust estate” in s 97 is not defined but “net income of the trust
estate” is defined by s 95 indicates an intention to adopt the concept of
ordinary income in the former. Executor Trustee and Agency Co of
South Australia Ltd v Federal Commissioner of Taxation (Pearson’s
Case) (21), which might suggest otherwise, concerned a differently
phrased predecessor to s 97. The phrase “income of the trust estate” in
s 97 was not amended when Pt IIIA – dealing with the comprehensive
taxation of capital gains – was introduced in 1986. One can infer that
no change was thought necessary because “income of the trust estate”
did not include capital gains. Section 254 of the 1936 Act, which
before 1986 made a trustee answerable as taxpayer for the doing of
things required by the 1936 Act in respect of “income” derived as
trustee, was amended to include the words “or any profits or gains of a
capital nature” after the word “income”. If “income” had included
capital gains in the context of the taxation of trust income there would
have been no need for that amendment. The definition of “taxpayer” in
s 6 was expanded to take account of capital profits. The contention that
“income of the trust estate” in s 97 means income according to
ordinary concepts in the hands of the trustee is supported by Totledge’s
case (22) and Federal Commissioner of Taxation v ANZ Savings Bank
Ltd (23). [GUMMOW J. Is not “presently entitled to a share of the
income of a trust estate” a composite phrase which should not be
chopped up? It is the product of going through some steps in trust law,
amongst other things.] The first step concerns the tax concept of
income according to ordinary concepts received by the trustee.
[GUMMOW J. At that stage there is an intrusion of trust law.] Section 95
deals with a statutory concept of net income. Cajkusic v Federal
Commissioner of Taxation (24) decided that expenses that were not
deductible in determining the “net income” of the trust estate under
s 95 were to be taken into account in determining whether there was
any “income of the trust estate” to which the beneficiaries could be
presently entitled. Hence there was no “income of the trust estate” to
which the beneficiaries could be presently entitled and the whole of the
net income was assessable to the trustee. It was accepted that there was
(20) eg, Gibbs v Commissioner of Taxation (1966) 118 CLR 628, which concerned
s 47A of the 1936 Act.
(21) (1932) 48 CLR 26.
(22) (1980) 60 FLR 149; 12 ATR 830; 40 ALR 385; 82 ATC 4,168.
(23) (1998) 194 CLR 328 at 337.
(24) (2006) 155 FCR 430.
492
COMMONWEALTH LAW REPORTS
[2010
income according to ordinary concepts in the hands of the trustee, and
it had to be decided whether the beneficiaries’ present entitlement was
to be determined before or after deductions properly made for trust
law, but not tax purposes, reduced the income to which they could
become presently entitled to nil. The Court in Cajkusic’s case
misunderstood the judgment of Gleeson CJ in the ANZ Savings Bank
case (25) in stating that it was wrong to look at the trust deed for s 97
purposes to turn income into capital.
There is no policy or assumption underlying Div 6 or s 97 that, as a
general rule, liability for tax in respect of the income of a trust estate
should correspond to the enjoyment of that income. First, none of the
approaches to the construction of “income of the trust estate” in s 97
adopted by the Full Federal Court or advocated in this appeal would
give effect to such a policy. Every approach in certain circumstances
would give rise to a liability to tax on amounts in excess of the amount
to which a beneficiary is entitled. Secondly, Div 6 is directed to a
simpler policy of ensuring that trust income is either taxed to a trustee
(ss 98, 99, 99A) or a beneficiary (s 97): Tindal’s case (26). The
legislative history and extrinsic materials for the introduction of s 97
do not disclose any consideration before the enactment of Div 6 given
to potential disparity between the income of the trust estate and the
amount to be taxed. No policy consideration appears to have been
given to whether beneficiaries should be assessed on amounts
commensurate with their entitlements. The primary concern of
Parliament since the 1915 Act has been to ensure that trust income is
brought to tax in someone’s hands, irrespective of whether it can be
identified as belonging to a particular person, and to ensure that trust
income is brought to tax in the year in which it is derived, is taxed at a
beneficiary’s marginal rate if it is income to which a beneficiary is
presently entitled, and is taxed at the top marginal rate if it is
accumulated.
The legislative history is as follows. The approach of the 1915 Act
was to assess the trustee on the whole income of the trust, with a
proportionate reduction based on income actually distributed.
Beneficiaries were assessed on their “beneficial interests” in income
derived under any instrument of trust. Amendments were made in 1918
so that, like Div 6, the “income of the trust estate” was taxed either to
the trustee or to a beneficiary who was “presently entitled” to a share
of that income. Such a beneficiary was assessed on his “individual
interest” in the income of the trust estate that would have been taxable
if the trustee were liable to pay the tax in respect of that income. The
1918 amendments were directed to a concern that it was inequitable
that undistributed income of a trust estate be taxed at the trustee’s
marginal rate rather than the (possibly) lower rate applicable to a
(25) (1998) 194 CLR 328.
(26) (1946) 72 CLR 608 at 618.
240 CLR 481]
FCT V BAMFORD
493
beneficiary who is entitled to receive it. The 1922 Act which
consolidated and amended the 1915 Act, essentially replicated in s 31
the provision as amended in 1918. It was amended in 1930 to ensure
that beneficiaries who had no beneficial interest in the corpus of the
estate did not get the benefit of prior year losses of the trustee in the
calculation of the income of the trust estate if the trustee were liable to
pay the tax in respect of the income. That amendment was intended to
prevent life tenants from escaping tax by taking the benefit of prior
year trading losses charged against corpus of a trust estate. Division 6
of the 1936 Act replaced s 31 of the 1922 Act. It broke up s 31 into a
number of provisions, and introduced the concept of “net income of a
trust estate” (ss 95 and 97), while retaining the original concept of
“income of a trust estate” (s 97). Nothing in the Explantory
Memorandum to the Income Tax Assessment Bill 1935 or the reports of
the Royal Commission on Taxation preceding the 1936 Act shed any
light on why s 97 was so drafted. There are various amendments to
Div 6 since 1936, but the relevant provisions are not materially
different from those enacted in 1936 except in two respects. First,
s 99A did not appear in the original Div 6. In 1936, the liability of a
trustee to pay tax in respect of the “net income” of the trust estate was
governed wholly by s 99. Rather than a trustee being liable to tax in
respect of that part of the “net income” that is not otherwise assessed to
a beneficiary under s 97 or to a trustee in respect of a beneficiary under
s 98, the original s 99 made a trustee assessable where there was “a
part of the income of a trust estate” to which no beneficiary “was
presently entitled”. In those circumstances the trustee would be
assessed on “that part of that net income”. Secondly, the rate at which
trustees are assessed to pay tax has changed. The introduction of s 99A
in 1964 meant that, unless the Commissioner exercised his discretion
to apply s 99, a trustee was liable to tax where no beneficiary was
presently entitled at a special flat rate. The purpose of that amendment
was to provide “a basis for imposing a special rate of tax on the
accumulated income of certain trust estates” (27).
If, contrary to our submission, there is a policy underlying Div 6
that liability for tax on income of a trust estate should reflect or
otherwise correspond with the enjoyment of that income, it would
follow that “income of the trust estate” would be better construed to
mean that which is treated as income in the hands of the trustee for
income tax purposes. Hence, a capital profit would be “income of the
trust estate” within s 97 but for the reason (contrary to the
beneficiaries’ argument) it is statutory income of the trust estate by
reason of ss 102-5(1) and 104-10 of the 1997 Act. This alternative, a
construction of “income of the trust estate” in s 97 as referring to all
amounts in the trustee’s hands that are treated as income for taxation
(27) Explanatory Memorandum to the Income Tax and Social Services Contribution
Assessment Bill (No 3) 1964, p 80.
494
COMMONWEALTH LAW REPORTS
[2010
purposes, would cover income shown in the diagram in s 6-1 as
“ordinary income” and “statutory income”. It would ensure that
trustees were not liable to pay tax in respect of statutory income to
which beneficiaries are presently entitled and limit the burden of
taxation on beneficiaries to the taxable amounts to which they are
presently entitled and tax any excess of net income to the trustee under
s 99 or s 99A, thus securing the payment of tax on the whole of the net
income. It would also allow net capital gains to be dealt with by s 97 in
the same way as ordinary income, and would ensure that subdiv 115-C
of the 1997 Act treats beneficiaries as having made capital gains to the
extent of their entitlement to capital gains reflected in the “net
income”, with the consequence that those gains may be discounted. It
is consistent with the original 1936 ss 99 and 96. In Union-Fidelity
Trustee of Australia Ltd v Federal Commissioner of Taxation (28)
Kitto J said “[t]he operation of [ss 97, 98 and 99] is only to provide for
the taxation of ‘the net income of the trust estate’, the need to do so
being a consequence of the provision in s 96 that, except as provided, a
trustee shall not be liable to pay tax upon that income”. If the function
of s 96 is to make it clear that Div 6 is an exclusive code for the
taxation of trustees, it ought to apply to all kinds of income liable to be
taxed as “net income” under Div 6. The alternative construction would
also sit comfortably with Resch v Federal Commissioner of
Taxation (29).
Beneficiaries’ appeal: Division 6 of Pt III is designed to secure
payment of tax upon the whole of the net income of a trust estate,
either from a beneficiary or the trustee, whether or not that amount is
paid over to or on account of the beneficiary. To be assessed under s 97
a beneficiary must be “presently entitled” to at least some of the
income of the trust estate. The share of the “net income” upon which a
beneficiary will be assessed will be that proportion of the “net income”
that the beneficiary’s present entitlement to the income of the trust
estate bears to the distributable income of the trust estate. The phrase
“that share” in s 97 has a fixed and singular meaning which applies
regardless of how a beneficiary’s entitlement may be expressed by the
trust deed or in a determination by the trustee. The meaning of “that
share” is “proportion” not “part” or “portion”.
The two principal approaches to the construction of “that share” in
s 97 have been the “quantum” and the “proportionate” approach. We
contend for the proportionate. The beneficiaries contend for a third
approach which turns on the prescription of entitlement of the relevant
beneficiaries ascertained from the terms of the trust and decisions
under the trust instrument. The balance of present authority has
adopted the proportionate approach. The beneficiaries’ novel approach
has not been considered in any previous case. The differences between
(28) (1969) 119 CLR 177 at 188.
(29) (1941) 66 CLR 198 at 210, 213, 224.
240 CLR 481]
FCT V BAMFORD
495
the two principal views are set out in Federal Commissioner of
Taxation v Pilnara Pty Ltd (30). Under the proportionate approach, one
must first determine whether any of the distributable income is the
subject of present entitlement in a beneficiary and then include in the
assessable income of that beneficiary the whole of the appropriate
proportion of the “net income” of the trust estate. If there are
beneficiaries entitled to the whole of the “income of the trust estate”,
the whole of the “net income” will be taxed in their hands. By contrast
the quantum view would include in a beneficiary’s assessable income
only so much of the “net income” of the trust estate as he was entitled
to and assess any other part to the trustee as income to which no
beneficiary is presently entitled. Where the “net income” of the trust
estate exceeds the “income of the trust estate”, on the proportionate
view s 97 may assess a beneficiary on amounts he neither did nor could
receive while, on the quantum view, the excess net income would be
taxed under s 99A. The proportionate approach has been held to be
correct (31). Hence the meaning of “share” in ss 95 and 97 read in
context is “proportion” rather than “amount” or “part”. Section 97
requires one to ascertain “the share of the income of the trust estate” to
which the beneficiary is presently entitled and to apply “that share” to
the “net income” of the trust estate. The process is a careful and
deliberate instruction to calculate the amount to be assessed to the
beneficiary. It is not a single step process akin to that in s 31 of the
1922 Act. Section 101 does not demand a different conclusion. The
reference there to an “amount” is not inconsistent with “share” in s 97
meaning “proportion”. Section 101 deems a beneficiary to be presently
entitled to an amount and s 97 operates by reference to the proportion
that amount bears to the total income of the trust estate.
While the beneficiaries do not advance the quantum approach as
such, their connotation and denotation argument has the result that in
some circumstances it becomes a quantum approach. There is a
fundamental problem with the quantum approach. Where the income of
a trust estate exceeds the net income of that estate, the proportionate
approach would require that the share of the net income included in the
assessable incomes of the presently entitled beneficiaries is the
proportion each present entitlement bears to the distributable income of
the trust estate. A strict quantum approach provides no basis for
determining the shares of net income. Further, if “share” means the
fixed amount determined by the present entitlement, the shares of the
beneficiaries in the net income might exceed the actual net income.
The beneficiaries’ construction departs too far from the language of
s 97(1). It substitutes, as the integer against which the present
(30) (1995) 96 FCR 82 at 102.
(31) Davis v Federal Commissioner of Taxation (1989) 20 ATR 548 at 576-577; 86
ALR 195 at 230-231; 89 ATC 4,377 at 4,403-4,404; Zeta Force Pty Ltd v Federal
Commissioner of Taxation (1998) 84 FCR 70 at 74-83; Cajkusic v Federal
Commissioner of Taxation (2006) 155 FCR 430 at 436.
496
COMMONWEALTH LAW REPORTS
[2010
entitlement to a “share” is to be ascertained, the s 95 “net income” for
the statutory integer “income of the trust estate”. Section 97(1)(a)
proceeds on the basis that a relevant “share” has already been
ascertained by applying the opening words of s 97(1), by reference to
“income of the trust estate”, which then has to be applied to “net
income”. The beneficiaries contend that in their construction the
connotation of “share” is constant, but what is constant there is the
source of the meaning of the word (the trust deed or a determination by
the trustee) rather than its conceptual meaning. That meaning varies
between “proportion”, “specified amount” and “the balance”, depending on how the entitlement of the relevant beneficiaries is expressed in
the deed or in a determination by the trustee. These are not different
examples of the denotation of “share”; they fix different meanings to
the word. The variable meaning of “share” would also permit tax
effective manipulation. The beneficiaries contend for a hybrid approach
which combines the proportionate approach, where a beneficiary’s
entitlement is expressed as a proportion, a quantum approach, where it
is expressed as a fixed amount, and a “balance” approach, where the
entitlement is to the balance remaining after fixed entitlements are
satisfied. It suffers from the flaws inherent in each approach. The
principal problem of the quantum approach – that it does not provide a
basis for determining the shares of the net income where the
distributable income of the trust exceeds the net income – is not
resolved by the hybrid approach. Nor does the beneficiaries’
construction deal with the problem raised by the proportionate
approach in particular circumstances. Like that approach, the
construction will give rise to the assessment of beneficiaries to tax on
income they have not received where entitlements are fractional or
proportionate. Further, the construction will cause a beneficiary entitled
to the balance of income remaining after the satisfaction of fixed
entitlements to be assessed on any excess of net over distributable
income. This can give rise to a more serious anomaly than any arising
on the proportionate approach. It would result in an assessment of a
beneficiary who is notionally entitled to the balance of the distributable
income after specific appointments have been made in circumstances
where in fact there was no residual income to be appointed. Even
where a beneficiary appointed the balance of income does become
entitled to a distribution (ie because there was residual income), there
is no reason why taxing such a beneficiary on the excess net income is
more rational than taxing the excess to all beneficiaries who are
presently entitled, in proportion to their entitlements. The proportionate
approach maintains a relationship between receipt and tax burden, at
least on a percentage basis. Where the beneficiary entitled to the
balance of income is not in fact entitled to receive any distribution, the
beneficiaries’ construction would give no meaning to “is presently
240 CLR 481]
FCT V BAMFORD
497
entitled” in s 97. The adoption of a hybrid approach to s 97 in
Richardson v Federal Commissioner of Taxation (32) was wrong.
The purpose of Div 6, to secure payment of tax on the whole of the
net income of a trust estate, either from a beneficiary or the trustee,
whether or not that amount is paid to or for the beneficiary (33) is
achieved by the Full Court’s construction of s 97. There is no
underlying assumption that liability for trust estate income should
correspond to its enjoyment (34). The legislative history does not
support that assumption even if it may have been assumed that
distributable income will correspond with net income. Observations in
Whiting’s case (35) were directed to present entitlement.
If, contrary to our submission there is such an underlying policy of
Div 6, neither the Full Court’s construction of s 97 (for which we
contend) nor the beneficiaries’ construction is consistent with it; for a
consistent interpretation then to be adopted, one would need to
construe “income of the trust estate” so as to refer to all amounts in the
hands of the trustee that are treated as income for taxation purposes;
and the words “that share” of the income of the trust estate are taken to
be a reference to so much of the “income of the trust estate” to which
the beneficiary is presently entitled, as is reflected in “net income” as
defined. That alternative interpretation would (a) assess all of the “net
income” of the trust estate to the beneficiaries and/or the trustee;
(b) give effect to each element of s 97(1)(a); (c) unlike the quantum
approach, provide a basis for determining the “share” of net income
where the “income of the trust estate”, and the beneficiaries’ fixed
entitlements to it, exceed the “net income”; (d) limit the amount to be
included in the assessable income of a beneficiary to the amount to
which he is presently entitled; (e) assess any excess of the “net
income” of the trust estate over the “income of the trust estate” to the
trustee. This alternative construction of “that share” differs from the
quantum approach in that it is capable of allocating shares of net
income where the “income of the trust estate” is more than the “net
income”. It does so by including in the assessable income of the
beneficiary the share of “net income” that reflects the share of income
to which the beneficiary is presently entitled. If the alternative
construction is correct, s 97 would not operate to include the excess of
net income over distributable income ($191,701) in the income of any
beneficiary here because, while reflected in “net income”, no part was
reflected in the “income of the trust estate” to which a beneficiary was
presently entitled. The excess would be assessed to the trustee under
s 99A.
(32)
(33)
(34)
(35)
(1997) 80 FCR 58.
Tindal’s case (1946) 72 CLR 608 at 618.
Zeta Force Pty Ltd v Federal Commissioner of Taxation (1998) 84 FCR 70 at 82.
(1943) 68 CLR 199 at 215.
498
COMMONWEALTH LAW REPORTS
[2010
The beneficiaries filed submitting appearances in the Commissioner’s appeal and the trustee filed a submitting appearance in the
beneficiaries’ appeal.
A H Slater QC, in reply. In Totledge’s case (36), it was recognised
that a beneficiary may have an interest in income received by a trustee
which equity will protect without having a present entitlement to
receive it.
Cur adv vult
30 March 2010
1
2
3
4
5
6
THE COURT delivered the following written judgment: ––
These appeals are brought from the Full Court of the Federal Court
(Emmett, Stone and Perram JJ) (37) and have been heard together.
They concern the operation with respect to the income tax years of
2000 (the taxpayers’ appeal) and 2002 (the Commissioner’s appeal) of
the provisions of Div 6 of Pt III of the Income Tax Assessment Act
1936 (Cth) (the 1936 Act). Division 6 is headed “Trust income” and
comprises ss 95-102. There is no relevant difference in the text of
Div 6 as it stood in 2000 and 2002.
It is appropriate at this stage to note that s 97(1) applies where “a
beneficiary of a trust estate … is presently entitled to a share of the
income of the trust estate” and that, if so, the assessable income of the
beneficiary includes “that share of the net income of the trust estate”.
For the reasons which follow each appeal should be dismissed.
The facts
The facts are not in dispute and were fully detailed by
Emmett J (38). It is sufficient to state what follows.
P & D Bamford Enterprises Pty Ltd (the Trustee) is the second
respondent in the taxpayers’ appeal and the third respondent in the
Commissioner’s appeal. By deed of settlement made 9 February 1995
it was trustee of the trusts of the settlement established by that deed
(the Deed). Mr and Mrs Bamford were among the class of “Eligible
Beneficiaries” defined in cl 1(d). So also was Church of Scientology
Inc (the Church). Mr and Mrs Bamford were directors and employees
of the Trustee. They are the appellants in the taxpayers’ appeal, and
first and second respondents in the Commissioner’s appeal.
The Deed provided that, as to “the income arising from the Trust
Fund” (as defined in cl 1(n)), the Trustee was to hold it for such of the
Eligible Beneficiaries as it selected under a provision in cl 4. This
clause was of a kind found in what are commonly called “discretionary
(36) (1980) 60 FLR 149 at 157-158; 12 ATR 830 at 837; 40 ALR 385 at 393; 82 ATC
4,168 at 4,173-4,174.
(37) Bamford v Federal Commissioner of Taxation (2009) 176 FCR 250.
(38) (2009) 176 FCR 250 at 253-257.
240 CLR 481]
FCT V BAMFORD
French CJ, Gummow, Hayne, Heydon and Crennan JJ
499
trusts”. Clause 7(n) empowered the Trustee to determine whether any
receipt “is or is not to be treated as being on income or capital
account”.
7
8
9
10
11
12
The 2002 year of income
In respect of the 2002 year of income, the subject of the
Commissioner’s appeal, it was common ground that the Trustee treated
as income available for distribution the net capital gain of $29,227
arising from the sale of certain real property in which the Trustee had
held a half share. That capital gain was divided equally and included in
the distribution made to Mr and Mrs Bamford by the Trustee. Mr and
Mrs Bamford each lodged a tax return for the 2002 year in accordance
with that distribution (39).
However, the Commissioner considered that the capital gain was not
included in “the income of the trust estate” of which s 97(1) speaks,
with the result that there was no income of the trust estate to which
s 97(1) could apply and that the Trustee itself was to be assessed under
s 99A of the 1936 Act.
In this Court the Commissioner submits, contrary to the decision of
the Full Court, that “the income of the trust estate” did not include this
amount. This is said to be so because, while available for distribution
in accordance with the Deed, the capital gain amount was not, in the
sense of the 1936 Act, “income according to ordinary concepts”.
On the second day of the hearing of the appeals the Commissioner
made it clear that he accepts that the appeal should be dismissed if “the
income of the trust estate” within the meaning of s 97(1) includes
“statutory income” such as capital gains which are brought in as
“assessable income”.
The 2000 year of income
In respect of the 2000 year, the subject of the taxpayers’ appeal, the
state of affairs giving rise to the dispute is more complex. Shortly put,
the issue of construction concerns the application of the phrase “that
share” in s 97(1) in circumstances where the entitlement of
beneficiaries is not to fixed proportions of the income of the trust estate
but, as to some beneficiaries, to specific amounts and, as to another
beneficiary, to the residue.
The Trustee determined under the Deed that the income for the year
ended 30 June 2000 be distributed, as to consecutive amounts of $643
each to a child of Mr and Mrs Bamford, the next $12,500 to Narconon
Anzo Inc, the next $106,000 to the Church, the next $68,000 to Mr and
Mrs Bamford in equal shares, and the balance to the Church. The
Trustee determined pursuant to cl 7(n) of the Deed that certain
outgoings be treated as expenses and, in error, treated them as
allowable deductions in computing the net income of the trust estate
for the purposes of s 97(1). This was shown as $187,530.
(39) (2009) 176 FCR 250 at 256-257.
500
13
14
15
16
17
COMMONWEALTH LAW REPORTS
[2010
Upon making the distributions in the above sequence, there was
insufficient remaining to provide the $68,000 to Mr and Mrs Bamford,
and no balance to go to the Church. There remained $67,744, which
was distributed equally between Mr and Mrs Bamford (ie each
received $33,872).
Rather than being merely $187,530, the net income of the trust
estate included the non-deductible outgoings of $191,701. The
Commissioner assessed Mr and Mrs Bamford by calculating the ratio
which the actual distributions of $33,872 bore to the total of $187,530,
and then applied that ratio to the excess of the net income addition of
$191,701 over the distributable income. The Commissioner included
the product of that calculation ($34,624) in the assessable income of
each of the taxpayers. The taxpayers (contrary to the decision of the
Full Court) contend that their share of the net income of the trust estate
and thus the amounts included in their assessable incomes should have
been ascertained as if the terms of the Deed, including the effect of any
exercise of power of appointment over income, applied to the
calculation of that “net income”.
The difference between the parties’ submissions may be illustrated
as follows. Upon the taxpayers’ case, if there were trust income of
$300,000 and net income of $180,000 and a beneficiary with an
annuity of $100,000, the beneficiary’s assessable income would be
fixed at $100,000. Upon the Commissioner’s case, the beneficiary’s
assessable income would not be fixed at $100,000 but would be the
same one-third proportion (ie $60,000).
Trust law and income tax law
Before turning to consider further the relevant provisions of the
1936 Act, the following points of a general nature should be made
respecting the intersection between the statute and the law of trusts.
First, both sides in argument on the present appeals accepted that
whichever of the competing constructions of Div 6 were accepted
examples could readily be given of apparent unfairness in the resulting
administration of the legislation; it is more than twenty years since
Hill J observed that “the scheme of Div 6 calls out for legislative
clarification, especially since the insertion into [the 1936 Act] of
provisions taxing capital gains as assessable income” (40). Secondly,
as Stone and Perram JJ emphasised (41) in the Full Court, the
distinction between income and capital in trust law was a product of
the administration of successive equitable estates with the balancing in
particular of the concern of those with life interests in the receipt of
income and those with remainder interests in the conservation and
augmentation of capital. Thirdly, the “rules” which were developed in
Chancery regarding apportionment between capital and income of
(40) Davis v Federal Commissioner of Taxation (1989) 20 ATR 548 at 576; 86 ALR
195 at 230; 89 ATC 4,377 at 4,403.
(41) (2009) 176 FCR 250 at 265.
240 CLR 481]
FCT V BAMFORD
French CJ, Gummow, Hayne, Heydon and Crennan JJ
18
19
20
501
receipts and outgoings and losses largely took the form of
presumptions which would yield to provision made in the trust
instrument (42). Fourthly, against this background it was to be
expected that the treatment of receipts and outgoings by a trustee
would not necessarily correspond with that in a taxing statute such as
the 1936 Act. Fifthly, the degree to which a revenue statute adopts or
qualifies or supplants the general understanding of terms with a
particular application in property law will be a matter of statutory
construction, but bearing in mind the caution expressed by
Lord Wilberforce in Gartside v Inland Revenue Commissioners (43)
that the transfer from one context to another may breed confusion.
Finally, there is the difficulty that while the general provisions in
ss 17 and 19 of the 1936 Act (44) speak of income derived by a
“person” and a trustee will answer that description, the trust itself, in
the absence of special provision in the legislation, will not be a
separate entity with the distinct character of a taxpayer.
Writing of the provisions of the 1936 Act dealing with trusts and
companies as they stood in 1958 Professor Ford said that looking at “a
trust in the abstract” there appeared to be two methods by which it
could be dealt with in the scheme of income taxation (45). He
continued (46):
“First, the trust could be treated as a separate entity and the
income of the trust as a whole could be assessed as one unit. Under
this approach no regard would be had to the income which
beneficiaries under the trust derive from other sources. The rate of
tax would be that appropriate to the total taxable income of the trust
and the trustees would be assessed in respect of that income. If a
trust were treated as a tax entity in this way its position would, in a
broad sense, be like that of a company. In fact, not only is tax
assessed and paid on the taxable income of a company but in
addition, dividends paid by the company to its shareholders are, in
general, taxed as part of the income of each shareholder. The
suggested analogy between a trust treated as a tax entity and a
company is a broad one, and is not intended to imply that similar
double taxation should operate when trust income is distributed to
beneficiaries.”
However, Professor Ford went on to write that wherever possible the
1936 Act adopted in Div 6 of Pt III what he described as the second
approach for a scheme of income taxation. This was as follows:
(42) Jacobs’ Law of Trusts in Australia, 7th ed (2006), p 485 [1952].
(43) [1968] AC 553 at 617.
(44) Now rendered into “plain English” by the “Core provisions” in Pt 1-3 of the
Income Tax Assessment Act 1997 (Cth).
(45) Ford, “Income and Estate Taxation Affecting Trusts”, Melbourne University Law
Review, vol 1 (1958) 419, at p 420.
(46) Ford, “Income and Estate Taxation Affecting Trusts”, Melbourne University Law
Review, vol 1 (1958) 419, at p 420.
502
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“[T]he trust could be treated as a mere conduit through which the
beneficiaries under the trust receive income. Under this approach
the income received by each beneficiary would be aggregated with
his income from other sources and tax would be assessed against the
beneficiary on that aggregated income at the rate appropriate
thereto.”
This second approach was implemented by Div 6.
The provisions of Div 6
The primary provision remains s 96. This states: “Except as
provided in this Act, a trustee shall not be liable as trustee to pay
income tax upon the income of the trust estate.” (Emphasis added.)
Section 96 had its immediate predecessor in s 31 of the Income Tax
Assessment Act 1922 (Cth), which in turn had been preceded by s 26 of
the Income Tax Assessment Act 1915 (Cth) (47). The Court was taken
to the text of this and earlier federal and Victorian legislation (48)
respecting the taxation of trust income, but it provides no immediate
assistance in the construction of Div 6 for the purposes of the present
appeals.
The structure of Div 6 as first enacted was as follows. Special
provision was made in s 98 for assessment of and payment by the
trustee where a beneficiary was presently entitled to “a share of the
income of a trust estate” but under a legal disability. Further, where no
beneficiary was presently entitled the trustee was to be assessed and
liable to pay (s 99); s 99 is now subject to s 99A. Finally, in the case of
revocable trusts whereby the person creating the trust had the power to
acquire a beneficial interest in the income derived during the year of
income the Commissioner was empowered to assess the trustee (s 102).
A central provision was s 97. It is upon the construction of this
provision, as it stood in the 2000 and 2002 income tax years after
amendments to Div 6 over the years, that these appeals turn. As
enacted s 97 stated:
“(1) Where any beneficiary is presently entitled to a share of the
income of a trust estate and is not under any legal disability, his
assessable income shall include that share of the net income of
the trust estate.
(2) The exempt income of any such beneficiary shall include his
individual interest in the exempt income of the trust estate,
except to the extent to which that exempt income is taken into
account in calculating the net income of the trust estate.”
Section 97(1) in its current form substitutes for “income of a trust
estate” the phrase “income of the trust estate”. The two phrases appear
(47) Inserted by Income Tax Assessment Act 1918 (Cth), s 21.
(48) Including s 12(1)(d) of the Income Tax Act 1896 (Vic). This rendered the trustee
liable, as a taxpayer, in respect of income earned, derived or received by the
trustee where no other person was “presently entitled” to it and the trustee was “in
actual receipt” of it.
240 CLR 481]
FCT V BAMFORD
French CJ, Gummow, Hayne, Heydon and Crennan JJ
27
28
29
503
throughout Div 6 (in both its original form and its current form) but are
not defined. The expression “net income” when used in Div 6 in
relation to a trust estate is defined in s 95(1). The relationship, in the
construction of s 97(1), between the terms “the income of the trust
estate” and “the net income of the trust estate” gives rise to difficulties
some of which require resolution in these appeals.
The term “trust estate” appears throughout Div 6 and is attached to
the term “trustee”, but not defined. Nor is the term “beneficiary”.
However, the term “trustee” is defined in s 6(1) in terms that take the
reader immediately beyond a realm limited to the trusts of a settlement
or testamentary trust.
The definition of “trustee” in s 6(1) is as follows:
“trustee in addition to every person appointed or constituted
trustee by act of parties, by order, or declaration of a court, or by
operation of law, includes:
(a) an executor or administrator, guardian, committee, receiver, or
liquidator; and
(b) every person having or taking upon himself the administration
or control of income affected by any express or implied trust, or
acting in any fiduciary capacity, or having the possession, control or
management of the income of a person under any legal or other
disability.”
In considering this definition it is important to note that it is said in
s 6(1) to apply “unless the contrary intention appears”. Thus, it is not
to be assumed that every person or entity which answers the statutory
definition will be a trustee for the purposes of Div 6 of Pt III. The
opening words of the definition speak of a trustee in the ordinary sense
of a person who holds property on trust while paras (a) and (b) include
persons in whom trust property is not vested. For example, a liquidator,
although identified in para (a), is not a trustee of a trust estate in any
ordinary sense (49).
Nevertheless, the reach of Div 6 beyond settlements and
testamentary trusts is illustrated by three decisions of this Court. The
official receiver of the estate of a bankrupt was taxed under Div 6 in
Offıcial Receiver v Federal Commissioner of Taxation (Fox’s
Case) (50). In Harmer v Federal Commissioner of Taxation (51) Div 6
applied to moneys paid into the Supreme Court of Western Australia
where no claimant had any vested interest in them; it was sufficient to
attract Div 6 that the effect of the relevant West Australian legislation
and Rules of Court was that the moneys were held upon trust for
statutory purposes.
(49) Federal Commissioner of Taxation v Linter Textiles Australia Ltd (In liq) (2005)
220 CLR 592.
(50) (1956) 96 CLR 370 at 383-384.
(51) (1991) 173 CLR 264.
504
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On the other hand, in Registrar of Accident Compensation Tribunal
v Federal Commissioner of Taxation (52) the majority in this Court
held that the Registrar was a trustee “pure and simple” (53) of awards
of compensation required by Victorian legislation to be paid into a fund
under control of the Registrar. The trusts were for the benefit of those
entitled to the compensation moneys, as individual beneficiaries,
notwithstanding that the trusts arose under the legislation, rather than
as a result of the acts of individuals (54). The result was that interest
then earned was income of trust estates to which Div 6 applied.
Division 6 is now drawn to distinguish between a trust estate which
is “a resident trust estate” and “a non-resident trust estate” in relation
to the relevant year of income (s 95(2), (3)). Nothing turns on that
distinction for these appeals, which, it is accepted, concern resident
trust estates. Section 97 is now expressed to be subject to the “closely
held trust” provisions of Div 6D (ss 102UA-102UV). The purpose of
Div 6D is to provide the Commissioner with information respecting the
“ultimate beneficiaries” of certain net income and tax-preferred
amounts (s 102UA(1)). A “tax-preferred amount” includes “income of
the trust that is not included in its assessable income in working out its
net income” (s 102UI).
If a “net capital gain”, as defined in s 995-1(1) of the Income Tax
Assessment Act 1997 (Cth) (the 1997 Act), is made it will be taken into
account in computing the net income of the trust estate within the
meaning of s 95(1) of the 1936 Act as part of the assessable income,
which is defined by reference to Div 6 of the 1997 Act (55). Special
rules found in Subdiv 115-C of the 1997 Act then may allow
beneficiaries to reduce their liability by their available capital losses
and unapplied net capital losses.
So far as is presently relevant s 97(1) reads:
“Subject to Division 6D, where a beneficiary of a trust estate who
is not under any legal disability is presently entitled to a share of the
income of the trust estate:
(a) the assessable income of the beneficiary shall include:
(i) so much of that share of the net income of the trust estate as
is attributable to a period when the beneficiary was a resident;
and
(ii) …
(b) …”
(Emphasis added.)
The phrase “the net income of the trust estate” is to be read with the
definition in s 95(1):
(52)
(53)
(54)
(55)
(1993) 178 CLR 145.
(1993) 178 CLR 145 at 171.
(1993) 178 CLR 145 at 170.
See s 6(1) of the 1936 Act (definition of “assessable income”) and ss 6-10 and
102-5 of the 1997 Act.
240 CLR 481]
FCT V BAMFORD
French CJ, Gummow, Hayne, Heydon and Crennan JJ
35
36
37
38
505
“net income, in relation to a trust estate, means the total
assessable income of the trust estate calculated under this Act as if
the trustee were a taxpayer in respect of that income and were a
resident, less all allowable deductions, except deductions under
Division 16C or Schedule 2G and except also, in respect of any
beneficiary who has no beneficial interest in the corpus of the trust
estate, or in respect of any life tenant, the deductions allowable
under Division 36 of the Income Tax Assessment Act 1997 in respect
of such of the tax losses of previous years as are required to be met
out of corpus.”
On the other hand, and as already remarked, the expression “the
income of the trust estate” which appears both in s 97 and in the basic
provision of s 96 is not defined. This poses the first construction issue,
that in the Commissioner’s appeal.
“The net income of the trust estate” and “the income of the trust
estate”
The very juxtaposition within s 97(1) of the defined expression “net
income of the trust estate” and the undefined expression “the income of
the trust estate” suggests that the latter has a content found in the
general law of trusts, upon which Div 6 then operates.
The opening words of s 97(1) speak of “a beneficiary of a trust
estate” who is “presently entitled to a share of the income of the trust
estate”. The language of present entitlement is that of the general law
of trusts, but adapted to the operation of the 1936 Act upon distinct
years of income. The effect of the authorities dealing with the phrase
“presently entitled” was considered in Harmer v Federal Commissioner of Taxation (56), where it was accepted that a beneficiary would
be so entitled if, and only if,
“(a) the beneficiary has an interest in the income which is both
vested in interest and vested in possession; and (b) the
beneficiary has a present legal right to demand and receive
payment of the income, whether or not the precise entitlement
can be ascertained before the end of the relevant year of income
and whether or not the trustee has the funds available for
immediate payment.”
The elaboration of those propositions that may be called for in the
application of s 98 (being the elaboration to which Kitto J adverted in
Taylor v Federal Commissioner of Taxation (57)) need not be
examined in this matter.
The identification in s 97(1) of “a trust estate” of which there is “a
beneficiary” also bespeaks the general law of trusts. It is true that
s 97(1) must be read with s 96. This is addressed to “a trustee”, and the
effect of the decisions to which reference has been made is that there
may be a trustee of a trust created by the operation of a legislative
(56) (1991) 173 CLR 264 at 271.
(57) (1970) 119 CLR 444 at 451-452.
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COMMONWEALTH LAW REPORTS
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regime not by settlement inter vivos or testamentary disposition.
Nevertheless, there must be a “trust estate”.
Further, the phrase “presently entitled to a share of the income”
directs attention to the processes in trust administration by which the
share is identified and entitlement established. The relevant operation
of those principles, supported by a review of the authorities, was
described as follows by Bowen CJ, Deane and Fitzgerald JJ in Federal
Commissioner of Taxation v Totledge Pty Ltd (58). Their Honours said:
“A beneficiary under a trust who is entitled to income will
ordinarily only be entitled to receive actual payment of the
appropriate share of surplus or distributable income: the trustee will
be entitled and obliged to meet revenue outgoings from income
before distributing to a life tenant or other beneficiary entitled to
income. Indeed, circumstances may well exist in which a trustee is
entitled and obliged to devote the whole of gross income in paying
revenue expenses with the consequence that the beneficiary entitled
to income may have no entitlement to receive any payment at all.
This does not, however, mean that a life tenant or other beneficiary
entitled to income in a trust estate has no beneficial interest in the
gross income as it is derived. He is entitled to receive an account of
it from the trustee and to be paid his share of what remains of it
after payment of, or provision for, the trustee’s proper costs,
expenses and outgoings.”
Reliance was placed by the Commissioner upon a passage in
Federal Commissioner of Taxation v Australia and New Zealand
Savings Bank Ltd (59). There was, however, in that case no submission
to the effect that the trust deed could operate to treat as capital receipts
what otherwise might have been included as income of the trust estate.
This is apparent from the argument in the Full Court of the Federal
Court in that case (60), and the argument there, as in this Court, was, as
the Trustee submitted in this appeal, upon other issues.
Finally, the Commissioner only partially invoked the operation of
the 1936 Act to give content to the expression “income of the trust
estate”, and would exclude “statutory income”, which is not income
according to ordinary concepts. The lack of consistency which this
involves tells against the submission.
The result is that the Commissioner’s appeal should be dismissed.
There remains the second construction issue. The resolution of that
issue is sequential to that of the first issue.
(58) (1982) 60 FLR 149 at 157-158; 12 ATR 830 at 837; 40 ALR 385 at 393; 82 ATC
4,168 at 4,173-4,174.
(59) (1998) 194 CLR 328 at 337 [15].
(60) Australia and New Zealand Savings Bank Ltd v Federal Commissioner of Taxation
[No 2] (1997) 75 FCR 25 at 32.
240 CLR 481]
FCT V BAMFORD
French CJ, Gummow, Hayne, Heydon and Crennan JJ
43
44
45
507
“That share”
The second question of construction is presented by the presence in
para (a)(i) of s 97(1) of the phrase “that share”, which links the
preceding identification of present entitlement to “a share” of the
income of the trust estate to the defined expression “the net income of
the trust estate”. On its face the section may appear to postulate the
same share of two subject matters which do not correspond.
Emmett J referred to the submissions by Mr and Mrs Bamford that
where the entitlement of a beneficiary is to a specified amount, as in
the present case, and not to a proportionate part, the word “share”
means that amount and that this is because “share” reflects the
particular method for determination of entitlement to trust income (61).
His Honour continued (62):
“Mr and Mrs Bamford say that, where there is a disparity
between the net income of the trust estate and the distributable
income, entitlement to which is governed by the trust instrument,
the amount in respect of which each beneficiary is assessable must
be calculated as if the terms of the trust instrument and any relevant
appointment operated upon the amount of the net income of the
trust estate as if it were the distributable income. They say that such
a result accords with the concept that the liability to tax upon
income should follow from the distribution of income according to
the terms of the trust.”
These submissions were correctly rejected.
The resolution of the second issue of construction is to be found in
the analysis by Sundberg J in Zeta Force Pty Ltd v Federal
Commissioner of Taxation (63). His Honour dealt with the first issue of
construction to the same effect as that just explained, saying:
“The words ‘income of the trust estate’ in the opening part of
s 97(1) refer to distributable income, that is to say income
ascertained by the trustee according to appropriate accounting
principles and the trust instrument. That the words have this
meaning is confirmed by the use elsewhere in Div 6 of the
contrasting expression ‘net income of the trust estate’. The
beneficiary’s ‘share’ is his share of the distributable income.”
Sundberg J then continued:
“Having identified the share of the distributable income to which
the beneficiary is presently entitled, s 97(1) requires one to ascertain
‘that share of the net income of the trust estate’. That share is
included in the beneficiary’s assessable income. The expression ‘net
income of the trust estate’ in para (a)(i) has the meaning given it by
s 95(1) – taxable income as opposed to distributable income. The
words ‘that share’ in para (a)(i) refer back to the word ‘share’ in the
(61) (2009) 176 FCR 250 at 259.
(62) (2009) 176 FCR 250 at 259.
(63) (1998) 84 FCR 70 at 74-75.
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COMMONWEALTH LAW REPORTS
[2010
expression ‘a share of the income of the trust estate’, and indicate
that the same share is to be applied to an income amount calculated
according to a different formula (taxable income as opposed to
distributable income). Since the income amount may differ
according to which formula is applied, the natural meaning to give
to ‘share’ where it appears for the second time is ‘proportion’ rather
than ‘part’ or ‘portion’. When Parliament wanted to convey the
latter meaning, as it did in ss 99 and 99A, it used the word ‘part’.
The contrast between the expressions ‘share of the income of the
trust estate’ and ‘that share of the net income of the trust estate’
shows that the draftsman has sought to relate the concept of present
entitlement to distributable income, and not to taxable income,
which is, after all, an artificial tax amount. Once the share of the
distributable income to which the beneficiary is presently entitled is
worked out, the notion of present entitlement has served its purpose,
and the beneficiary is to be taxed on that share (or proportion) of the
taxable income of the trust estate.”
That analysis should be accepted. It follows that the taxpayers’
appeal should be dismissed.
Orders
Each appeal should be dismissed. No costs orders were made in the
Federal Court, there being an agreement between the parties respecting
costs (64), and no costs orders should be made in this Court.
In each matter, the appeal is dismissed.
Solicitor for the Commissioner, Australian Government Solicitor.
Solicitors for the beneficiaries and trustee, Robert Richards &
Associates.
JDM
(64) (2009) 176 FCR 250 at 265.